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Cartel Pricing Dynamics, Price Wars and Cartel Breakdown

  • Manganelli, Anton-Giulio
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    This paper gives an unified explanation of some of the most widely known facts of the cartel literature: prices gradually rise, then remain constant, there can be price wars and some cartels break down. In this model consumers are loss averse and efficiency of a competitive fringe is not publicly observable. In the best collusive equilibrium, the price expectation can be so low that loss aversion makes consumers not buy at the maximal collusive price: firms then set a lower price that rises in time with consumers’ expectations. This increasing price path is bounded from above by the presence of the fringe. If the fringe sets a low price during a sufficient number of periods, there can be price wars and collusion can eventually break down.

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    Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 12-309.

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    Date of creation: May 2012
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    Handle: RePEc:tse:wpaper:25843
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    1. Victoria Prowse & David Gill, 2009. "A Structural Analysis of Disappointment Aversion in a Real Effort Competition," Economics Series Working Papers 448, University of Oxford, Department of Economics.
    2. Koszegi, Botond & Rabin, Matthew, 2004. "A Model of Reference-Dependent Preferences," Department of Economics, Working Paper Series qt0w82b6nm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. Michael S. Haigh & John A. List, 2005. "Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis," Journal of Finance, American Finance Association, vol. 60(1), pages 523-534, 02.
    4. Abrantes-Metz, Rosa M. & Froeb, Luke M. & Geweke, John & Taylor, Christopher T., 2006. "A variance screen for collusion," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 467-486, May.
    5. Besanko, David & Spulber, Daniel F, 1989. "Antitrust Enforcement under Asymmetric Information," Economic Journal, Royal Economic Society, vol. 99(396), pages 408-25, June.
    6. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
    7. David Genesove & Christopher Mayer, . "Loss Aversion and Seller Behavior: Evidence from the Housing Market," Zell/Lurie Center Working Papers 323, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
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